Pepsi Weighed Down by Latest Earnings Report
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When I hear the name PepsiCo (NYSE: PEP) I think about its most famous product Pepsi Cola. However, PepsiCo's businesses are about a lot more than just Pepsi Cola. PepsiCo is an international company that markets snacks foods, grocery foods, and non-alcoholic beverages. PepsiCo’s owns well known brands such as Frito Lays, Doritos, Quaker Oats, Gatorade and Tropicana. PepsiCo, which has its headquarters in Purchase, NY is a massive company with a market cap of $103 billion. In 2011, PepsiCo had revenues of $66.5 billion.
PepsiCo is a highly diversified company that operates in over 200 countries, with its largest markets in North America and the United Kingdom. “The company serves 86% of the world's population and international sales account for 48% of revenue.”
PepsiCo’s product offerings are also diverse, and unlike its primary competitor Coca-Cola (NYSE: KO), the majority of its revenues do not come from carbonated soft drinks. PepsiCo receives less than 50% of its revenues from beverage sales. The company’s revenues are divided amongst six different business divisions. The Frito Lay division is the largest division and provides 29% of the company’s revenues and 43% of its operating income. The other divisions provide revenues and operating income as follows, Quaker Oats revenues 4% and operating income 8%, Latin America Foods revenues 14% and operating income 13%, PepsiCo Americas Beverages revenues 25% and operating income 29%, PepsiCo United Kingdom and Europe revenues 15% and operating income 10%, and PepsiCo Middle East, Africa and Asia revenues 13% and operating earnings 8%.
On April 26th PepsiCo reported earnings for the first quarter of 2012. The company had earnings per share of $0.71 which matched its earnings per share from the first quarter of 2011. The company had first quarter revenues of $12.4 billion, which was a 4.2% increase from revenues of $11.9 billion in the first quarter of 2011. First quarter net income was $1.12 billion, which was roughly equal to net income of $1.14 billion, in the first quarter of 2011. Investors were not excited by PepsiCo’s first quarter earnings and in the week following the earnings report the stock price decreased by 1%.
Despite PepsiCo’s relatively flat earnings, its CEO Indra Nooyi sees a silver lining. In the first quarter conference call she said, “Emerging markets revenue growth was particularly strong, up 13% on a constant-currency basis, led by strong double-digit organic revenue growth of 21% in India, 13% in Brazil, 33% in Saudi Arabia and 26% in Egypt”. Revenue growth in emerging markets is good news for PepsiCo, because emerging markets account for almost 50% of the company’s sales.
PepsiCo’s earnings have been moving higher but at a slower rate than its primary competitor. Since 2009 PepsiCo has increased its revenues by 54% and its net income by 8%. This compares to Coca-Cola which increased revenues by 50% and net income by 26% over the same period. Despite similar revenue growth, Coca-Cola’s net income has increased at a rate that is more than three times faster than PepsiCo’s. One reason that Coca-Cola’s net income has grown at a faster rate than PepsiCo’s is because the company has been run in a more efficient manner. In 2011 Coca-Cola had gross margins of 60.5 and operating margins of 23.4 versus PepsiCo which had gross margins of 52.2 and operating margins of 15.4.
PepsiCo’s Pros
PepsiCo has some of the most recognized beverage and stock food brands in the world. “The company has the largest market share in US beverages at 39%, and the snack food market at 25%. “Such brand dominance insures loyalty and repetitive sales.”
The company also benefits from its diversity. PepsiCo’s “top 18 brands generate annual sales of over $1 Billion. PepsiCos arsenal also includes ready-to-drink teas, juice drinks, bottled water, as well as breakfast cereals, cakes and cake mixes. This broad product base plus a multi-channel distribution system serve to help insulate PepsiCo from shifting business climates.”
PepsiCo’s pays a growing and highly competitive dividend. On May 2nd, the company announced that it would increase its dividend by 4% from $2.06 per share to $2.15 per share. The company’s CEO Indra Nooyi “said that The Board's decision to increase our annual dividend demonstrates the confidence we have in the fundamental strength of PepsiCo's business and our future growth prospects." PepsiCo has increased its dividend for 40 consecutive years, and over the last five years, the amount of the dividend has increased by 79%.
PepsiCo is positioning itself to take advantage of growing foreign markets. On March 31st, PepsiCo and Tingyi Holding Corp., announced that they have completed their transaction to create a strategic beverage alliance in China, which is projected to become the world's largest beverage market by 2015. Tingyi is one of the leading food and beverage companies in China. The alliance fits into PepsiCo’s plan to increase its international businesses. PepsiCo’s CEO issued a statement which stated that “By leveraging the complementary strengths of each company, we'll be able to significantly enhance our beverage business in China, reach millions of new consumers throughout the country, and create value for Tingyi and PepsiCo shareholders."
PepsiCo’s Cons
PepsiCo is still heavily dependent on its US market, which has seen relative flat earnings growth. The company also is overly dependent on Wal-Mart (NYSE: WMT) which is its largest customer. Wal-Mart which accounts for 12% of its PepsiCo’s revenues, has the leverage to force PepsiCo’s to lower prices. This is a problem because Wal-Mart’s business strategy puts an “emphasis on private-label sales which produce a higher profit margin than national brands.”
Over the past year, PepsiCo’s earnings and stock price have been flat, and the company does not seem to have a catalyst which could significantly change its momentum.
Conclusion
PepsiCo’s stock price is down by 4.8% over the last 52 weeks. The stock has performed poorly because of the company’s meager earnings growth and lack of a catalyst to increase earnings. I like the company’s overall business and 3.1% dividend yield, however, PepsiCo’s primary competitor Coca-Cola, also offers a competitive dividend along with a greater potential for capital appreciation.
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